Blog Network

A 20p increase just isn’t good enough.

Earlier this year, the Low Pay Commission recommended that the National Minimum Wage for adults should rise by 20p to £6.70 per hour. Whilst this is an above inflation rise, and would mean that the real value of the minimum wage would be higher than before the coalition Government came into power, this level leaves a lot to be desired and shows a disappointing lack of vision.

Eye on the Economy

By Ross Baxter*

________________

The minimum wage will be increasing, but by nowhere near the level it should be. (Photo: www.freeimages.co.uk)

My current job pays above the current living wage, but that has not always been the case. Until very recently, I have always been in jobs that were well below this, often earning on the National Minimum Wage itself, and it has always been a struggle to live on. Bearing in mind that I am looking at this from the perspective of a young person who doesn’t have many outgoings, I can only begin to imagine what it is like for those who do have higher costs, such as single parents. Quite frankly, it is embarrassing to see that as a society, we are willing to let people struggle in this way, and we have got to get this fixed as soon as possible.

A higher minimum wage, set at the level of the living wage, would help to solve so many issues in this country today. Firstly, and obviously, it would ensure that people had enough money to be able to live. It would allow people to live healthier lifestyles, reducing a big burden on the NHS, and it would help with education and literacy, as parents would be able to afford to buy their children simple things such as books.

The Labour Party has said that if elected, they will ensure a minimum wage of £8 per hour by 2020, but this isn’t near ambitious enough, considering that the living wage outside of London is already at a level of £7.85, meaning £8 an hour would, by that time, be massively under the living wage level, as it is now. A minimum (and living) wage by 2020 would need to be at least £10 per hour, as suggested by the Green party, to stand any chance of reflecting the costs of living in modern society.

Evidence has also shown that paying employees a living wage is good for businesses, and according to the Living Wage Foundation companies where it has been implemented have reported seeing absenteeism reduced by 25%. Employers saw a decline in turnover amongst their staff, with PricewaterhouseCoopers (PwC) noting their turnover of contractors reducing from 4% to 1%. What’s more, over 80% of employers also reported increased productivity and quality of work.

It would also have the positive note of benefitting society as a whole, and would give a much needed boost to the economy. Naturally, in receiving higher wages, those who are most affected by an increase at the lower end would have more disposable income to spend. This would inevitably lead to a rise in public consumption as those who previously could not afford to spend much now can. That movement of money within the system would allow businesses to be able to afford the rise that they have implemented. A living wage would also have a positive effect on public finances, as it would lead to an increase in tax revenue, with less benefits being needed to supplement the incomes of those already in work.

People on low incomes are currently forced
to lock away any disposable income, saving
for a rainy day, and are not able to help
stimulate the economy by spending. A living
wage would help to change that.
(Photo: www.freeimages.co.uk)

Whilst reforming the National Minimum Wage, the age brackets that are currently in place should be scrapped, and all people who work should be guaranteed the same minimum level. Allowing employers to pay 16-20 year olds less, solely based on their age is not only discriminatory, but also completely illogical, as a number of this age bracket are not able to rely on their family for financial support. Furthermore, if you think it’s difficult to live on £6.50 per hour, (as the National Minimum Wage currently is), then it is near impossible to live on £5.13 (for 18-20 year olds) or £3.79 (for 16 and 17 year olds). We would also need to scrap the separate minimum wage for apprentices of any age, and ensure that they are paid the same level as any other working person.

It has been argued that increasing the NMW by such a large amount would increase unemployment due to the increased cost of production it represents for businesses. However, what with the high competition for jobs, it is clear that businesses have been suppressing wage rates, keeping them below the market rate. The job market therefore can afford this, as an increase would be taking the minimum to a realistic level, rather than increasing it from one. Various studies and papers have also shown that in practice an increase does not lead to a variation in employment figures. Indeed, when the Minimum Wage was first introduced in the UK, the same worries were raised, but were found to be without merit, as the Minimum Wage is now much higher in real terms than when it was introduced, and this has not led to a higher level of unemployment.

An appropriate living wage has been shown both in theory and in practice to improve not only the lifestyles of the people who are paid that level, but also the society and the country that those who are paid it live in. It would also set an example to the rest of the world, proving that everyone can benefit from such policies, and with time, it has the potential to lead to a much greater planet for us all.*Ross Baxter is a 25 year-old, Green Party member.

9 Responses

Before I begin let me explain several things. 1) I support above inflation increases in the NMW, as long as it has no detrimental impact on employment, but 2) I don’t want to be political with the minimum wage. I would much prefer it was in the LPC’s hands – a group of economists, trade unionists and employers – rather than a group of economically illiterate politicians. 3) And, a quote from the most recent LPC report: “Overall we judge that excessively sharp increases in the minimum wage would put jobs at risk”. Bear that in mind. Oh, and the BoE have said the flexibility of wages during the recession prevented any “Great Depression” like rise in unemployment – i.e allowing the real value of the real wage to decline.

Claim 1: It wouldn’t lead to an increase in unemployment. Research from the National Institute of Economic Research – one of the most respected economic institutions in the UK – suggests that’s 160,000 jobs would be lost if there was a statutory imposition of the Living Wage. On top of this, 300,000 fewer young people would be employed due to the substitution effect, Further to this, the LPC say that raising the NMW to £7 by 15/16 would “increase unemployment by 14,000”. You’re claim that raising the NMW would have little impact of unemployment seems to be falling apart. And yes, you can refer to many reports from trade unions or left-leaning think tanks that suggest the opposite, but I don’t think you could find two more objective sources than the LPC and NIESR. “Papers have also shown that in practice an increase does not lead to a variation in employment figures”. Yes this is very true, meta analysis also supports it. But: 1) This focuses on the US, which has a significantly lower NMW than the UK, and 2) they work off small movements in the NMW, not the dramatic increase to £10 you are suggesting. This would lead to real terms increased in the NMW of over 10% a year.

Claim 2: “the age brackets that are currently in place should be scrapped”. It’s a nice idea, paying everyone the same minimum wage. But it fundamentally ignores the fact that different age groups have different productivities. If you have more experience, more employment history and more training, then you will inevitably have a higher productivity, meaning your RULC are lower, so employees can afford to pay you more. It is just not economical for an employer to hire an 18 year old, with no experience, on £10 an hour, Why would they. Instead you could hire someone at the same rate with vastly more experience. This prevents low skilled workers from ever getting a foot on the employment ladder. Even if this isn’t directly observable, you also have to think about the “jobs forgone” of an extreme rise in the NMW. Lets say a firm was considering hiring a new worker, maybe at close to NMW. Then you decide to ramp up his employment bill by 10% (by increasing the NMW gradually to £10 over 5 years). This will almost certainly put him off hiring the new person? This is the “silent effect” of sharp rises in the NMW, they may not impact current employment numbers, but they destroy jobs that may have been potentially created. Referring to the NIESR report, they say that due to this policy: “300,000 jobs would be lost by young low-skilled employees”. The policy you are advocating would directly affect thousands of young-low skilled people, exactly the kind of people this is meant to benefit. Youth unemployment is currently at very high levels, and the existence of a high minimum wage is hardly helping the situation. The “bite” associated with the NMW for younger workers if much higher than that of the average worker (BIS 2014), representing over 85% of the median wage. Increasing it further and abolishing age bands will significantly impact employment in this age group. Just look at the evidence since the NMW was implemented in 1999; the 18-24-unemployment rate has increased from 11.5% to 17.9% today. Of those unemployed in this age group, the number out of work for more than twelve months has increased from 14.4% to 31.8%. The NMW disproportionately hurts the young. Increasing it further (especially to £10 an hour) is going to hurt them even more. It makes complete sense for apprentices, who are learning on the job, and therefore not contributing a full-jobs-amount to the company, to not be paid the full minimum wage. Don’t forget that the apprentices are benefitting from the training and experience; it isn’t just a one-way street. Do you think employers would hire as many apprentices if their rate was tripled to £10 an hour? What would happen to the people who lost out?

Claim 3: “Firstly, and obviously, it would ensure that people had enough money to be able to live.” Well this is a nice assumption that the NMW is a targeted poverty reduction tool. 46% of households in poverty are workless, so this would do nothing for them. On top of this, 44% of low-paid workers are in households in the top half of the income distribution (i.e they have a spouse that is earning significantly more than them). Let alone the living wage, 60% of those earning less than it are working part-time.

Claim 4: It would “also have a positive effect on public finances”. The most optimistic studies show it would have a net impact of £30 million. Hardly anything. And that’s ignoring the hysteresis effect of a generation of young workers who cant get a foot on the employment ladder, or the pain of the 160,000 people who would lose their jobs.

Claim 5: “it is clear that businesses have been suppressing wage rates, keeping them below the market rate.” Anyone who understands economics realised that employers pay MRPL=MR. Thus, if productivity falls, as it has done during the recession, then you would expect real wages to fall. If productivity doesn’t increase, then any increases in wages just increase RULCs and therefore prices. If you can provide any evidence on the contrary I would be happy to look at it?Let me finish by saying this. You may think the NMW is a great political gimmick that can be used to hit large multinational corporations who refuse to give their workers a fair wage. But that’s just wrong. It is an incredibly powerful and, potentially destructive, policy that no political party should play games with (i.e raising it to £10 an hour without any academic support). 2) SMEs disproportionately employ people on NMW, not the Amazons or Googles.This policy would destroy employment opportunities for young people and push many small companies out of business. And, if I may say so, if you’re going to write a controversial socialist article, at least base it one some sort of reputable independent evidence.

There has indeed been research that suggests that unemployment would rise (As with anything, there is always an argument in the opposite direction), however these same arguments were made when NMW was introduced in the first place, and in practice found to be completely without merit. Companies still need their staff, and having to give them a gradual increase in pay isn't going to decrease that need. Studies performed haven't just been in the US, but in various western economies including the UK, Canada and Australia, amongst others.

The idea that you should pay people less simply based on their age is scandalous. There have been ridiculous agist arguments made in the past that people are less productive as they get older, and there would rightly be uproar if an argument was made to pay them less than the adult minimum wage based on this. The NMW actively helps the young, and doesn't hurt them, as it ensures that businesses aren't able to exploit them further by paying them as low a level as possible. I have first-hand experience of companies that make massive profits each year, yet will still pay their younger staff as low as possible. Matching the levels would ensure a fairer wage for everyone. Companies also recruit who they need. If they are looking short-term, a person with more experience may be better for them, if they are able to look further into the long-term, it could be that bringing someone in to train is advantageous. Not every decision that is made is simply based on "Who can we pay the least to do it?" Apprentices may well be learning on the job, however currently the employer is getting cheap labour, as some are using apprentices instead of hiring someone on a regular contract. There is however an argument to be made on the idea of apprentices being partly-subsidised by Government to ensure rates stay high after a large jump in the Apprentice NMW, with this gradually reducing over time to help with the cost to employers.

It is perfectly true that an increase in NMW would not help those that are not in work, and that is why it is essential that changes such as this are done as part of a wider shift in society. This article was simply about one of those changes, and obviously cannot reflect everything that links into it.

The evidence is there from the companies themselves. An overwhelming majority of those surveyed have said that they seen an increase in productivity amongst staff who are paid a living wage. The logic itself is there that people who are paid a decent wage will be more productive, as they will feel more motivated and valued. It can be argued that once it is at an acceptable level, it would be appropriate for it to follow the market line (following inflation, year-on-year increases based on company reward policy, etc.) however when it is at the low level that it currently is, it is important that this is increased to that acceptable point, for the long-term benefit of all.